The RBNZ could cut rates again if economic growth fails to improve

The RBNZ kept its overnight cash rate steady at 1.75% in September, as expected.

The bank is looking for stronger economic growth to help boost inflationary pressures. However, if that doesn’t happen, it could still cut interest rates again, noting the next move “could be up or down”.

Its base case for the cash rate is for it to remain at 1.75% “into 2020”.

The Reserve Bank of New Zealand (RBNZ) expects New Zealand economic growth will improve over the next year. However, if it doesn’t, it could cut official interest rates again.

That’s the main story to come from its September monetary policy statement with the bank holding its overnight cash rate (OCR) steady at 1.75%, a result that was entirely expected by markets.

“We expect to keep the OCR at this level through 2019 and into 2020,” RBNZ Governor Adrian Orr said.

“Employment is around its sustainable level and consumer price inflation remains below the 2% mid-point of our target, necessitating continued supportive monetary policy.

“Our outlook for the OCR assumes the pace of growth will pick up over the coming year, assisting inflation to return to the target mid-point.”

Given the uncertainty as to whether that will occur, Orr maintained the view that the direction of the RBNZ’s next OCR move “could be up or down”.

Bolstering the view that rates could still be cut, Orr said that while GDP growth in the June quarter was “stronger than we had anticipated, downside risks to the growth outlook remain”. Unlike August, he did not discuss any potential upside risks to the growth outlook.

However, ensuring that such a move is unlikely to arrive in the near-term, Orr said that “robust global economic growth and a lower New Zealand dollar exchange rate is expected to support demand for our exports”.

Domestically, he added that “ongoing spending and investment, by both households and government, is expected to support growth”.

Offsetting those positives, Orr said growing trade tensions could lead to a slowdown in the global economy.

“Trade tensions remain in some major economies, increasing the risk that ongoing increases in trade barriers could undermine global growth,” he said.

On inflation, a key pillar for policy settings along with labour market conditions, Orr struck an upbeat but largely unchanged tone, saying “there are welcome early signs of core inflation rising towards the mid-point of the target [of 2%]”.

In August, he simply said there were “early signs of core inflation rising”.

Orr also retained the view that inflation is expected to gradually rise to its target as “capacity pressures bite”.

Ensuring that process is unlikely to be derailed by an earlier-than-expected tightening of policy settings, Orr said he will keep the OCR at an “expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low and stable inflation”.

There has been little reaction in New Zealand financial markets, reflecting that the tone of the September statement was almost identical to that offered in early August. If anything, the lack of discussion of upside risks could be interpreted as a more dovish tone from the Governor.